UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 26, 1999
Commission File Number: 001-9249
GRACO INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
- ------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(612) 623-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------------ -------------
20,300,233 common shares were outstanding as of April 29, 1999.
<PAGE>
GRACO INC. AND SUBSIDIARIES
INDEX
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
1999 Corporate and Business Unit Annual
Bonus Plan Exhibit 10
Form of Stock Option Agreement under the Long Term
Stock Incentive Plan dated December 12, 1997. Exhibit 10.1
Executive Long Term Incentive Agreement between
the Company and one executive officer dated
February 22, 1999 Exhibit 10.2
Key Employee Agreement between the Company
and one executive officer dated March 1, 1999 Exhibit 10.3
Stock Option Agreement. Form of agreement used for
award of non-incentive stock options to one
executive officer, dated March 1, 1999. Exhibit 10.4
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule (EDGAR filing only) Exhibit 27
2
<PAGE>
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended
--------------------
March 26, 1999 March 27, 1998
-------------- --------------
(In thousands except per share amounts)
Net Sales $ 103,241 $ 105,717
Cost of products sold 50,384 53,772
----------- ------------
Gross Profit 52,857 51,945
Product development 4,754 4,782
Selling, marketing and distribution 19,305 22,647
General and administrative 9,524 10,165
----------- ------------
Operating Profit 19,274 14,351
Interest expense 1,953 225
Other (income) expense, net 320 279
----------- ------------
Earnings Before Income Taxes 17,001 13,847
Income taxes 5,800 4,900
----------- ------------
Net Earnings $ 11,201 $ 8,947
=========== ============
Basic Net Earnings Per Common Share $ .56 $ .35
=========== ============
Diluted Net Earnings Per Common Share $ .54 $ .34
=========== ============
See notes to consolidated financial statements.
3
<PAGE>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 26, 1999 Dec. 25, 1998
-------------- -------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 4,204 $ 3,555
Accounts receivable, less allowances
of $4,400 and $4,400 81,162 80,146
Inventories 34,111 34,018
Deferred income taxes 12,563 12,384
Other current assets 1,135 1,217
-------------- ------------
Total current assets 133,175 131,320
Property, Plant and Equipment:
Cost 199,706 199,122
Accumulated depreciation (105,355) (102,756)
-------------- ------------
94,351 96,366
Other Assets 6,046 6,016
-------------- ------------
$ 233,572 $ 233,702
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 11,056 $ 14,560
Current portion of long-term debt 1,715 3,157
Trade accounts payable 12,489 11,965
Salaries, wages & commissions 9,462 14,025
Accrued insurance liabilities 11,193 10,809
Income taxes payable 10,297 5,134
Other current liabilities 20,898 23,316
-------------- ------------
Total current liabilities 77,110 82,966
Long-term Debt, less current portion 105,353 112,582
Retirement Benefits and Deferred Compensation 29,133 28,841
Shareholders' Equity:
Common stock 20,294 20,097
Additional paid-in capital 27,274 23,892
Retained deficit (26,891) (35,878)
Other, net 1,299 1,202
-------------- ------------
Total shareholders' equity 21,976 9,313
$ 233,572 $ 233,702
============== ============
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks
------------------------------------
March 26, 1999 March 27, 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
<S> <C> <C>
Net Earnings $ 11,201 $ 8,947
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,773 3,994
Deferred income taxes (69) 158
Change in:
Accounts receivable (2,204) 952
Inventories (731) (2,531)
Trade accounts payable 471 1,999
Salaries, wages and commissions (4,396) (4,047)
Retirement benefits and deferred
compensation 380 (200)
Other accrued liabilities 3,573 2,922
Other 183 839
------------- -------------
12,181 13,033
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (2,015) (2,995)
Proceeds from sale of property, plant
and equipment 220 170
------------- -------------
(1,795) (2,825)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable and lines of credit 38,992 5,037
Payments on notes payable and lines of credit (42,397) (2,772)
Borrowings on long-term debt 2,000 -
Payments on long-term debt (10,632) (310)
Common stock issued 3,579 3,822
Retirement of common stock - (12)
Cash dividends paid (2,212) (2,811)
------------- -------------
(10,670) 2,954
------------- -------------
Effect of exchange rate changes on cash 933 1,698
------------- -------------
Net increase (decrease) in cash and cash equivalents 649 14,860
Cash and cash equivalents:
Beginning of year 3,555 13,523
------------- -------------
End of period $ 4,204 $ 28,383
============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the
Company) as of March 26, 1999, and the related statements of earnings and
cash flows for the thirteen weeks then ended, have been prepared by the
Company without being audited.
In the opinion of management, these consolidated statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of Graco Inc. and Subsidiaries as of
March 26, 1999, and the results of operations and cash flows for all
periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Therefore, these
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's 1998 Form 10-K.
The results of operations for interim periods are not necessarily
indicative of results that will be realized for the full fiscal year.
2. Major components of inventories were as follows (in thousands):
Mar. 26, 1999 Dec. 25, 1998
------------- -------------
Finished products and components $ 27,396 $ 27,764
Products and components in various
stages of completion 22,757 23,024
Raw materials 19,744 18,970
------------- -------------
69,897 69,758
Reduction to LIFO cost (35,786) (35,740)
------------- -------------
$ 34,111 $ 34,018
============= =============
6
<PAGE>
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. The Company has three reportable segments, Industrial/Automotive,
Contractor and Lubrication. Assets of the Company are not tracked along
reportable segment lines. Sales and operating profit by segment for the
thirteen weeks ended March 26, 1999 and March 25, 1998 are as follows (in
thousands):
Mar. 26, 1999 Mar. 27, 1998
------------- -------------
Net Sales
Industrial/Automotive $ 50,748 $ 57,428
Contractor 41,694 37,392
Lubrication 10,799 10,897
------------- -------------
Total $ 103,241 $ 105,717
============= =============
Operating Profit
Industrial/Automotive $ 9,745 $ 7,225
Contractor 8,899 7,039
Lubrication 2,288 1,750
Unallocated Corporate
expenses (1,658) (1,663)
------------- -------------
Consolidated Operating Profit $ 19,274 $ 14,351
============= =============
4. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will be effective for the
Company in fiscal year 2000. SFAS No. 133 requires that all derivatives
are recognized in the financial statements as either assets or liabilities
measured at fair value and also specifies new methods of accounting for
hedging transactions. The Company has not yet determined the impact of FAS
133, if any.
5. On April 28, 1999 the Company agreed to purchase the assets of Bollhoff
Verfahrenstechnik (BV), located in Bielefeld, Germany. BV designs,
manufactures and sells fluid application equipment for industrial and
automotive markets primarily in Germany, and had 1998 sales of
approximately $20 million.
7
<PAGE>
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Graco's net earnings of $11.2 million for the quarter ended March 26, 1999
increased 25 percent from first quarter 1998 earnings of $8.9 million. Diluted
earnings per share of $0.54 for the quarter were up 59 percent over diluted
earnings per share of $0.34 in the first quarter of 1998. The quarterly
performance was driven by reduced expenses and improved gross profit margins,
offset by increased interest expense and reduced sales. Diluted earnings per
share were higher due to higher earnings and the repurchase of 5.8 million
common shares of the Company's common stock during the third quarter of 1998.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Three Months
(13 weeks) Ended
--------------------
March March
26, 1999 27, 1998
-------- --------
Net Sales 100.0% 100.0%
-------- --------
Cost of products sold 48.8 50.9
Product development 4.6 4.5
Selling, marketing and distribution 18.7 21.4
General and administrative 9.2 9.6
-------- --------
Operating Profit 18.7 13.6
-------- --------
Interest expense 2.0 0.2
-------- --------
Other (income) expense, net 0.3 0.3
-------- --------
Earnings Before Income Taxes 16.4 13.1
Income taxes 5.6 4.6
-------- --------
Net Earnings 10.8% 8.5%
======== ========
Net Sales
Net sales in the first quarter of $103.2 million were down 2 percent from the
first quarter of 1998. Industrial/Automotive Equipment segment sales of $50.7
million are down 12 percent, due to slow sales in the Americas and Europe in
1999 and strong sales to automotive companies and automotive feeder plants in
Europe in 1998. First quarter Contractor Equipment segment sales of $41.7
million were 12 percent higher than last year due to strong demand in North
America. Lubrication Equipment segment sales decreased 1 percent from the first
quarter 1998 to $10.8 million as improved sales in the Americas were offset by
lower demand in Europe and in Asia.
8
<PAGE>
Geographically, sales in the Americas increased 4 percent to $74.7 million for
the quarter primarily due to strong Contractor sales. European quarterly sales
of $19.1 million were 18 percent lower than last year due to weak demand in all
segments. Asia Pacific sales of $9.3 million were 11 percent lower than last
year's first quarter due to the weak economy's in Japan.
Gross Profit
Gross profit as a percentage of net sales improved to 51.2 percent in the first
quarter, up 2.1 percentage points from the same period last year. The increase
was due to higher margins on automotive products resulting from the switch from
custom designed systems to pre-engineered packages, disciplined cost controls,
enhanced pricing, and more favorable exchange rates. The weakening of the US
dollar has improved gross margins as a greater proportion of the Company's sales
are denominated in currencies other than the US dollar than are costs.
Operating Expenses
First quarter operating expenses of $33.6 million decreased 11 percent from the
first quarter of 1998. Selling, marketing and distribution expenses were down 15
percent due primarily to restructuring of the Company's industrial and
automotive businesses in 1998. General and administrative expenses were down 6
percent, which included the results of the restructuring of the Company's Asia
Pacific operations in 1998. Product development costs were $4.8 million in both
the first quarters of 1999 and 1998.
Other Income (Expense)
Other expense was $0.3 million in the first quarter of 1999 and 1998.
Income Taxes
The effective tax rate decreased to 34 percent in the first quarter compared to
35 percent for the same period last year.
Liquidity and Capital Resources
The Company generated $12.1 million of cash flow from operating activities in
the first three months of 1999, compared to $13.0 million for the same period
last year. Significant uses of operating cash flow in 1999 included the payment
of 1998 sales incentives and bonuses and an increase in accounts receivable
balances. Available cash was used to fund short-term operating needs and pay
$12.0 million on net borrowings (notes payable and long-term debt). The Company
had unused lines of credit available at March 26, 1999 totaling $63.3 million.
The available credit facilities and internally generated funds provide the
Company with the financial flexibility to meet liquidity needs.
9
<PAGE>
Year 2000
The Year 2000 issue is the result of computer programs that were written using
two digits rather than four to define the applicable year, which could cause
potential failure or miscalculation in date-sensitive software that recognizes
"00" as 1900 rather than 2000.
The Company is continuing its program, begun in 1996, to ensure that all
information technology systems and non-information technology (non-IT) systems
will be Year 2000-compliant. The assessment phase of the Year 2000 Project has
been completed. It was determined that the Company needed to modify or upgrade
most of its mainframe applications, operating systems, network hardware and
software and desktop hardware and software. In addition, many non-IT systems
required upgrading or replacement in order to ensure proper functioning beyond
the year 1999.
The mainframe modification phase involving the conversion of core business
applications was completed in July 1998 and the operating systems' upgrades were
completed in November 1998. The network and desktop upgrades involving the
replacement of certain hardware and software is scheduled to be completed by
July 1999. Further testing of all mainframe applications and databases is
scheduled to continue through July 1999.
The Company has incurred costs totaling $5.1 million, including $0.6 million in
1999, and estimates a total of an additional $1.7 million to be spent in the
remainder of 1999 to resolve Year 2000 issues. These costs are charged to
expense as incurred and include software license fees and cost of persons
assigned to the project. Incremental costs associated with Year 2000 compliance
are not anticipated to result in significant increases in future operating
expenses and are not expected to have a material adverse effect on the results
of operations, liquidity and capital resources. Existing resources are being
redeployed and other projects are being delayed to accommodate Year 2000 related
projects. These delays are not expected to have a material adverse impact on
future results of operations or financial condition.
Business continuation plans for critical business processes and applications are
being developed. These plans include adequate staffing on-site during the Year
2000 date change to quickly repair any errant applications. In addition, in the
event of any problems the Company will follow its current computer outage
business continuation plans until such problems are corrected.
Approximately 240 non-IT applications were identified at the Company with
approximately 64 percent being Year 2000-compliant as of March 1999. Non-IT
applications are primarily microprocessors and other electronic controls
embedded in non-computer equipment used by the Company. Teams have been
assembled to ensure the successful conversion of the remaining systems. These
conversions are continuing in 1999.
The Company has a very limited number of products with embedded controls and
does not believe there are any Year 2000 compatibility issues with these
products. The Company has very few customers whose loss of business would be
material to the Company. It is not aware of any Year 2000 issues with these
customers that would have a material adverse impact on the Company's results.
The Company is having discussions with, and has sent questionnaires to, its
suppliers to assess their Year 2000 readiness. Information will continue to be
gathered from key suppliers until July 1999. At that time, the Company will
identify alternative suppliers for those key suppliers unable to supply
materials due to Year 2000 issues.
10
<PAGE>
Management believes that sufficient resources have been allocated and project
plans are in place to avoid any adverse material impact on operations or
operating results. However, there can be no guarantee that the Company's systems
will be converted in a timely fashion and Year 2000 problems will not have an
adverse effect on the Company. The Year 2000 efforts of third parties are not
within the Company's control and their failure to respond to Year 2000 issues
successfully could result in business disruption and increased operating costs
to the Company. At the present time, it is not possible to determine whether any
such events are likely to occur, or to quantify any potential impact they may
have on the Company's future results of operations and financial condition.
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the company's disclosures under the
heading: "SAFE HARBOR CAUTIONARY STATEMENT" below.
Outlook
While the Company expects 1999 to be a difficult year for sales growth, it
continues to plan for higher sales and strong earnings per share. Management
believes the strategic changes made in 1998 and prior years will allow the
Company to deliver higher profits in the turbulent international environment.
SAFE HARBOR CAUTIONARY STATEMENT
The information in this 10-Q contains "forward-looking statements" about the
Company's expectations of the future, which are subject to certain risk factors
that could cause actual results to differ materially from those expectations.
These factors include economic conditions in the United States and other major
world economies, currency exchange fluctuations, the results of the efforts of
the Company, its suppliers and customers, to avoid any adverse effect as a
result of the Year 2000 issue, and additional factors identified in Exhibit 99
to the Company's Report on Form 10-K for fiscal year 1998.
11
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1999 Corporate and Business Unit Annual
Bonus Plan Exhibit 10
Form of Stock Option Agreement under the Long
Term Stock Incentive Plan Dated December 12,
1997. Exhibit 10.1
Executive Long Term Incentive Agreement between
the Company and one executive officer dated
February 22, 1999 Exhibit 10.2
Key Employee Agreement between the Company
and one executive officer dated March 1, 1999 Exhibit 10.3
Stock Option Agreement. Form of agreement used
for award of non-incentive stock options to one
executive officer, dated March 1, 1999. Exhibit 10.4
Statement on Computation Exhibit 11
of Per Share Earnings
Financial Data Schedule (EDGAR filing only) Exhibit 27
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRACO INC.
Date: May 7, 1999 By: /s/James A. Earnshaw
James A. Earnshaw
Chief Executive Officer
Date: May 7, 1999 By: /s/James A. Graner
James A. Graner
Vice President & Controller
("duly authorized officer")
13
GRACO INC.
1999 CORPORATE
&
BUSINESS UNIT
ANNUAL BONUS PLAN
Effective January 1, 1999
Human Resources
<PAGE>
1999 EXECUTIVE CORPORATE & SBU BONUS PLAN
Objectives
- ----------
o To create shareholder value through achievement of annual financial
objectives.
o To motivate and retain those key executives and managers who work in
positions where they can impact the Company's annual financial objectives.
Plan Design
- -----------
The Plan links the size of each individual's award to specific financial
objectives. These objectives are tailored for the Corporation and for each
Business Unit. These objectives are:
o Corporation
o Corporate Sales and/or Net Earnings objectives
o Business Units
o Sales and/or Contribution Growth objectives
Eligibility Requirements
- ------------------------
Only those positions which carry clear managerial responsibility for directly
contributing to Graco's Corporate Sales and/or Net Earnings objective and
Business Unit Sales and/or Contribution Growth objectives are eligible to be
included in this Plan.
Only those individuals in eligible positions who have demonstrated and are
maintaining a performance level that meets the supervisor's normal expectations
for that position are eligible for annual participation in this Plan as well as
the receipt of any annual Bonus Payments.
<PAGE>
Participation
- -------------
The top executive in each organizational unit may nominate managers for
participation in this Plan when the established position and individual
eligibility requirements have been met.
The Management Organization and Compensation Committee of the Graco Inc. Board
of Directors has sole authority to approve the participation of the Chief
Executive Officer in the Plan.
The Chief Executive Officer of Graco Inc. has sole authority to select and
approve all other Plan participants.
Bonus Maximum
- -------------
Taken in conjunction with base salary market comparisons, bonus maximum for all
positions will be:
o Commensurate with the position's ability to impact the annual Corporate
Sales and/or Net Earnings objective and Business Unit Sales and/or
Contribution Growth objectives.
o Consistent with total compensation levels prevalent for similar positions
in the market place.
Based on these criteria, bonus maximums ranging from 10% to 80% have been
established for each individual.
Bonus Payment
- -------------
The determination of a participant's annual Bonus Payment will be calculated by
adding the bonus results attained for Corporate Sales and/or Net Earnings
performance (expressed in percent) to the bonus results attained for any
applicable Business Unit's Sales and/or Contribution Growth performance
(expressed in percent). These bonus results are then multiplied by the
participant's Maximum Bonus Percentage and then multiplied by the participant's
Base Salary for the Plan Year, to determine the total Bonus Payment.
Example:
- -------------- --------------
|Annual Annual | Participant's Participant's
|Corporate Business Unit| Maximum Annual
|Performance + Performance | x Bonus x Base = Bonus
|Results Results (if | Salary Salary
| applicable) | $ $ $
| % % |
- -------------- --------------
<PAGE>
1999 EXECUTIVE CORPORATE & SBU BONUS PLAN
-----------------------------------------
Administration
- --------------
The following rules have been established to ensure equitable administration of
Graco's Annual Bonus Plan (the Plan):
1. The Plan will be administered by the Management Organization and
Compensation Committee of the Board of Directors. The Committee may cancel
the Plan and interpret the Plan.
2. The Management Organization and Compensation Committee shall establish the
Annual Corporate Bonus Plan financial objectives. Within the basic
framework of the Plan, the Chief Executive Officer may establish the annual
bonus plan financial objectives for individual Business Units. The CEO may
also establish deadlines for filing administrative forms and adopt other
administrative rules.
The CEO has established the Bonus Administrative Committee consisting of
the CEO, the Director, Human Resources, and the Compensation Manager. This
Committee is responsible for making approval recommendations on all Annual
Bonus Program administrative matters, such as participation award payments,
performance measures, and performance results. All requests for adjustments
or exceptions are to be formally submitted to this Committee for review
through the Compensation Manager.
3. Key executives and managers selected to participate in the Plan after its
annual effective date (January 1st) may be included on a pro-rata basis.
4. Participation in the Plan one year does not necessarily assure
participation in subsequent years. Eligibility requirements for both the
position and individual performance must be met continually.
5. Participation continues during any paid time off such as short-term
disability (up to six months). Participation ceases with retirement, death,
or long-term disability (over six months). In the event participation
ceases due to retirement, death, or long term disability, the Participant
will be eligible for a Bonus Payment, calculated using the Maximum Bonus
Percent and Base Salary up to the time of retirement, death, or long-term
disability and the annual performance results for the year in which
retirement, death, or long-term disability occurs.
6. A participant who transfers to a position (e.g. through job posting or job
elimination) that is not eligible for inclusion in the Plan will be
eligible for a pro-rata award based on the actual time employed in the
eligible position during the year.
<PAGE>
Administration (continued)
- --------------------------
If, due to unique skills possessed by a participant, the company requests
that the participant accept a transfer to a non-bonus eligible position,
the participant will remain on the Plan. The participant's eligibility will
be reviewed annually as noted in Administrative Rule #4.
7. A participant must be an employee in good standing on 1/31 of the Plan Year
in order to receive a bonus. A participant who resigns or is terminated
effective during the Plan Year is ineligible for a bonus.
Participants must maintain satisfactory performance throughout the Plan
year in order to be eligible to receive a bonus award payment.
In addition, a participant whose employment termination has been requested
due to job elimination, performance or otherwise for cause will be
ineligible for a bonus payment even though the participant is still
employed at year-end.
8. All matrix calculations will include such effects as those created by
foreign exchange gain/loss translation and income tax rate changes.
9. All matrix calculations will be based on actual exchange rates, not plan
rates.
10. Acquisitions and divestitures not included in the annual business plan for
the Plan Year will be excluded from the Corporate Sales and/or Net Earnings
calculations.
11. Significant changes in historical FASB accounting practices or income tax
rates will be included in corporate earnings calculations at the discretion
of the Management Organization and Compensation Committee of the Board of
Directors.
12. Payments will be made by March 15th of the year following each successive
Corporate and Business Unit performance year.
These Administrative Rules indicate Graco's intent. Situations may arise which
are not specifically covered by these rules and will require the use of judgment
and discretion. Final responsibility for interpretation of these Administrative
Rules rests solely with the Director, Human Resources.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 100% Corporate Participants
================================================================================
================================================
1999 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
-------------- ------------------
$42,800 0.00%
$46,400 18.75%
$50,000 37.50%
$53,550 56.25%
$57,100 75.00%
================================================
================================================
1999 Percent of Maximum
Corporate Sales Bonus Award
Results Earned
-------------- ------------------
$436,000 0.00%
$449,100 6.25%
$462,200 12.50%
$475,250 18.75%
$488,300 25.00%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 50% Corporate Earnings Participants
================================================================================
================================================
1999 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
-------------- ------------------
$42,800 0.0%
$46,400 12.5%
$50,000 25.0%
$53,550 37.5%
$57,100 50.0%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 30% Corporate Earnings Participants
================================================================================
================================================
1999 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
-------------- ------------------
$42,800 0.0%
$46,400 7.5%
$50,000 15.0%
$53,500 22.5%
$57,100 30.0%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 25% Corporate Earnings Participants
================================================================================
================================================
1999 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
-------------- ------------------
$42,800 0.00%
$46,400 6.25%
$50,000 12.50%
$53,550 18.75%
$57,100 25.00%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 20% Corporate Earnings Participants
================================================================================
================================================
1999 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
-------------- ------------------
$42,800 0.0%
$46,400 5.0%
$50,000 10.0%
$53,550 15.0%
$57,100 20.0%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 15% Corporate Earnings Participants
================================================================================
================================================
1999 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
-------------- ------------------
$42,800 0.00%
$46,400 3.75%
$50,000 7.50%
$53,550 11.25%
$57,100 15.00%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 10% Corporate Earnings Participants
================================================================================
================================================
1999 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
-------------- ------------------
$42,800 0.0%
$46,400 2.5%
$50,000 5.0%
$53,550 7.5%
$57,100 10.0%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 10% Corporate Sales Participants
================================================================================
================================================
1999 Percent of Maximum
Corporate Sales Bonus Award
Results Earned
-------------- ------------------
$436,000 0.0%
$449,100 2.5%
$462,200 5.0%
$475,250 7.5%
$488,300 10.0%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
<PAGE>
================================================================================
1999
Corporate Performance Results and Awards
for 5% Corporate Sales Participants
================================================================================
================================================
1999 Percent of Maximum
Corporate Sales Bonus Award
Results Earned
-------------- ------------------
$436,000 0.00%
$449,100 1.25%
$462,200 2.50%
$475,250 3.75%
$488,300 5.00%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1999 Annual Business Plan.
STOCK OPTION AGREEMENT
(NON-ISO)
THIS AGREEMENT, made this day of , 199 , by and
-------- ----------------- ---
between Graco Inc., a Minnesota corporation (the "Company") and
-----------------
(the "Employee").
WITNESSETH THAT:
WHEREAS, the Company pursuant to it's Long-Term Incentive Stock Plan
wishes to grant this stock option to Employee;
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto hereby agree as follows:
1. Grant of Option
---------------
The Company hereby grants to Employee, the right and option
(hereinafter called the "option") to purchase all or any part of an
aggregate of shares of Common Stock of the Company, par value
-------
$1.00 per share, at the price of $ per share on the terms and
----------
conditions set forth herein.
2. Duration and Exercisability
---------------------------
A. This option may not be exercised by Employee until the expiration
of two (2) years from the date of grant, and this option shall in
all events terminate ten (10) years after the date of grant.
During the first two years from the date of grant of this option,
no portion of this option may be exercised. Thereafter this option
shall become exercisable in four cumulative installments of 25% as
follows:
Total Portion of Option
Date Which is Exercisable
---- --------------------
Two Years after Date of Grant 25%
Three Years after Date of Grant 50%
Four Years after Date of Grant 75%
Five Years after Date of Grant 100%
In the event that Employee does not purchase in any one year the
full number of shares of Common Stock of the Company to which
he/she is entitled under this option, he/she may, subject to the
terms and conditions of Section 3 hereof, purchase such shares of
Common Stock in any subsequent year during the term of this
option.
<PAGE>
B. During the lifetime of the Employee, the option shall be
exercisable only by him/her and shall not be assignable or
transferable by him/her otherwise than by will or the laws of
descent and distribution.
3. Effect of Termination of Employment
-----------------------------------
A. In the event that Employee shall cease to be employed by the
Company or its subsidiaries for any reason other than his/her
gross and willful misconduct, death, retirement (as defined in
Section 3. D. below), or disability (as defined in Section 3. D.
below), Employee shall have the right to exercise the option at
any time within one month after such termination of employment to
the extent of the full number of shares he/she was entitled to
purchase under the option on the date of termination, subject to
the condition that no option shall be exercisable after the
expiration of the term of the option.
B. In the event that Employee shall cease to be employed by the
Company or its subsidiaries by reason of his/her gross and
willful misconduct during the course of his/her employment,
including but not limited to wrongful appropriation of Company
funds or the commission of a felony, the option shall be
terminated as of the date of the misconduct.
C. If the Employee shall die while in the employ of the Company or a
subsidiary or within one month after termination of employment
for any reason other than gross and willful misconduct and shall
not have fully exercised the option, all remaining shares shall
become immediately exercisable and such option may be exercised
at any time within twelve months after his/her death by the
executors or administrators of the Employee or by any person or
persons to whom the option is transferred by will or the
applicable laws of descent and distribution, and subject to the
condition that no option shall be exercisable after the
expiration of the term of the option.
D. If the Employee's termination of employment is due to retirement
(either after attaining age 55 with 10 years of service, or
attaining age 65), or due to disability within the meaning of the
provisions of the Graco Long-Term Disability Plan subject to the
conditions that no option shall be exercisable after the
expiration of the terms of the option, all remaining shares shall
become immediately exercisable and the option may be exercised by
the Employee at any time within three years of the Employee's
retirement, subject to the condition that no option shall be
exercisable after the expiration of the term of the option. In
the event of the death of the Employee within the three-year
period after retirement, the option may be exercised at any time
within twelve months after his/her death by the executors or
administrators of the Employee or by any person or persons to
whom the option is transferred by will or the applicable laws of
descent and distribution, to the extent of the full number of
shares he/she was entitled to purchase under the option on the
date of death, and subject to the condition that no option shall
be exercisable after the expiration of the term of the option.
<PAGE>
E. Notwithstanding anything to the contrary contained in this
Section 3, if the Employee chooses to terminate his/her
employment by retirement (as defined in Section 3. D. above) and
has not given the Company written notice, by correspondence to
his/her immediate supervisor and the Chief Executive Officer, of
said intention to retire not less than six (6) months prior to
the date of his/her retirement, then in such event for purposes
of this Agreement said termination of employment shall be deemed
to be not a retirement but a termination subject to the
provisions of Section 3. A. above, provided, however, that in the
event that the Chief Executive Officer, in his/her sole
discretion and judgement, determines that termination of
employment by retirement of the Employee without six (6) months
prior written notice is in the best interests of the Company,
then such retirement shall be subject to Section 3. D. above.
4. Manner of Exercise
------------------
A. The option can be exercised only by Employee or other proper
party within the option period delivering written notice to the
Company at its principal office in Minneapolis, Minnesota,
stating the number of shares as to which the option is being
exercised and, except as provided in Section 4. C., accompanied
by payment-in-full of the option price for all shares designated
in the notice.
B. The Employee may, at Employee's election, pay the option price
either by check (bank check, certified check, or personal check)
or by delivering to the Company for cancellation shares of Common
Stock of the Company with a fair market value equal to the option
price. For these purposes, the fair market value of the Company's
Common Stock shall be the closing price of the Common Stock on
the date of exercise on the New York Stock Exchange (the "NYSE")
or on the principal national securities exchange on which such
shares are traded if the shares are not then traded on the NYSE.
If there is not a quotation available for such day, then the
closing price on the next preceding day for which such a
quotation exists shall be determinative of fair market value. If
the shares are not then traded on an exchange, the fair market
value shall be the average of the closing bid and asked prices of
the Common Stock as reported by the National Association of
Securities Dealers Automated Quotation System. If the Common
Stock is not then traded on NASDAQ or on an exchange, then the
fair market value shall be determined in such manner as the
Company shall deem reasonable.
C. The Employee may, with the consent of the Company, pay the option
price by arranging for the immediate sale of some or all of the
shares issued upon exercise of the option by a securities dealer
and the payment to the Company by the securities dealer of the
option exercise price.
<PAGE>
5. Payment of Withholding Taxes
----------------------------
Upon exercise of any portion of this option, Employee shall pay to the
Company an amount sufficient to satisfy any federal, state, or local
withholding tax requirements which arise as a result of the exercise
of the option or provide the Company with satisfactory indemnification
for such payment.
6. Change of Control
-----------------
A. Notwithstanding Section 2(a) hereof, the entire option shall
become immediately and fully exercisable on the day following a
"Change of Control" and shall remain fully exercisable until
either exercised or expiring by its terms. A "Change of Control"
means:
(1) acquisition by any individual, entity, or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act
of 1934), (a "Person"), of beneficial ownership (within the
meaning of Rule 13d-3 under the 1934 Act) which results in
the beneficial ownership by such Person of 25% or more of
either
(a) the then outstanding shares of Common Stock of the
Company (the "Outstanding Company Common Stock") or
(b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company
Voting Securities");
provided, however, that the following acquisitions will
not result in a Change of Control:
(i) an acquisition directly from the Company,
(ii) an acquisition by the Company,
(iii) an acquisition by an employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company,
(iv) an acquisition by any Person who is deemed to
have beneficial ownership of the Company common
stock or other Company voting securities owned by
the Trust Under the Will of Clarissa L. Gray
("Trust Person"), provided that such acquisition
does not result in the beneficial ownership by
such Person of 32% or more of either the
Outstanding Company Common Stock or the Out-
standing Company Voting Securities, and provided
further that for purposes of this Section 6, a
Trust Person shall not be deemed to have
<PAGE>
beneficial ownership of the Company common stock
or other Company voting securities owned by The
Graco Foundation or any employee benefit plan of
the Company, including, without limitations, the
Graco Employee Retirement Plan and the Graco
Employee Stock Ownership Plan,
(v) an acquisition by the Employee or any group that
includes the Employee, or
(vi) an acquisition by any corporation pursuant to a
transaction that complies with clauses (a), (b),
and (c) of subsection (4) below; and
provided, further, that if any Person's beneficial ownership
of the Outstanding Company Common Stock or Outstanding
Company Voting Securities is 25% or more as a result of a
transaction described in clause (i) or (ii) above, and such
Person subsequently acquires beneficial ownership of
additional Outstanding Company Common Stock or Outstanding
Company Voting Securities as a result of a transaction other
than that described in clause (i) or (ii) above, such
subsequent acquisition will be treated as an acquisition that
causes such Person to own 25% or more of the Outstanding
Company Common Stock or Outstanding Company Voting Securities
and be deemed a Change of Control; and provided further, that
in the event any acquisition or other transaction occurs
which results in the beneficial ownership of 32% or more of
either the Outstanding Company Common Stock or the
Outstanding Company Voting Securities by any Trust Person,
the Incumbent Board may by majority vote increase the
threshold beneficial ownership percentage to a percentage
above 32% for any Trust Person; or
(2) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of said Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board will be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial membership on the Board occurs as a result of an
actual or threatened election contest with respect to the
election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
<PAGE>
(3) The commencement or announcement of an intention to make a
tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a Person of 25%
or more of the Outstanding Company Common Stock or
Outstanding Company Voting Securities; or
(4) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, or statutory exchange
of Outstanding Company Common Stock or Outstanding Company
Voting Securities or sale or other disposition of all or
substantially all of the assets of the Company ("Business
Combination") or, if consummation of such Business
Combination is subject, at the time of such approval by
stockholders, to the consent of any government or
governmental agency, the obtaining of such consent (either
explicitly or implicitly by consummation) excluding, however,
such a Business combination pursuant to which
(a) all or substantially all of the individuals and
entities who were the beneficial owners of the
Outstanding Company Common Stock or Outstanding Company
Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly,
more than 80% of, respectively, the then outstanding
shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may
be, of the corporation resulting from such Business
Combination (including, without limitation, a
corporation that as a result of such transaction owns
the Company or all or substantially all of the
Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock or
Outstanding Company Voting Securities,
(b) no Person [excluding any employee benefit plan (or
related trust) of the Company or such corporation
resulting from such Business Combination] beneficially
owns, directly or indirectly, 25% or more of the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or the
combined voting power of the then outstanding voting
securities of such corporation except to the extent
that such ownership existed prior to the Business
Combination, and
(c) at least a majority of the members of the board of
directors of the corporation resulting from such
Business Combination were members of the Incumbent
Board at the time of the execution of the initial
Agreement, or of the action of the Board, providing for
such Business Combination; or
<PAGE>
(5) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
B. A Change of Control shall not be deemed to have occurred with
respect to an Employee if:
(1) the acquisition of the 25% or greater interest referred to in
subparagraph A.(1) of this Section 6 is by a group, acting in
concert, that includes the Employee or
(2) if at least 25% of the then outstanding common stock or
combined voting power of the then outstanding Company voting
securities (or voting equity interests) of the surviving
corporation or of any corporation (or other entity) acquiring
all or substantially all of the assets of the Company shall
be beneficially owned, directly or indirectly, immediately
after a reorganization, merger, consolidation, statutory
share exchange, disposition of assets, liquidation or
dissolution referred to in subsections (4) or (5) of this
section by a group, acting in concert, that includes that
Employee.
7. Adjustments
-----------
If there shall be any change in the number or character of the Common
Stock of the Company through merger, consolidation, reorganization,
recapitalization, dividend in the form of stock (of whatever amount),
stock split or other change in the corporate structure of the Company,
and all or any portion of the option shall then be unexercised and not
yet expired, appropriate adjustments in the outstanding option shall
be made by the Company, in order to prevent dilution or enlargement of
option rights. Such adjustments shall include, where appropriate,
changes in the number of shares of Common Stock and the price per
share subject to the outstanding option.
8. Miscellaneous
-------------
A. This option is issued pursuant to the Company's Long-Term
Incentive Stock Plan and is subject to its terms. A copy of the
Plan has been given to the Employee. The terms of the Plan are
also available for inspection during business hours at the
principal offices of the Company.
B. This Agreement shall not confer on Employee any right with respect
to continuance of employment by the Company or any of its
subsidiaries, nor will it interfere in any way with the right of
the Company to terminate such employment at any time. Employee
shall have none of the rights of a shareholder with respect to
shares subject to this option until such shares shall have been
issued to him/her upon exercise of this option.
<PAGE>
C. The Company shall at all times during the term of the option
reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
GRACO INC.
By Its Chief Executive Officer
---------------------------------------
Employee
---------------------------------------
AMENDMENT AGREEMENT - GRACO EXECUTIVE LONG TERM INCENTIVE AGREEMENT
(RESTRICTED STOCK AWARD)
Amendment Agreement, entered into this 22nd day of February, 1999, by and
between Graco Inc., a Minnesota corporation (the "Company"), and George
Aristides ("Mr. Aristides") which amends the Agreement between the parties
entitled "Graco Executive Long Term Incentive Agreement (Restricted Stock
Award)", dated May 6, 1998 (the "Agreement").
WHEREAS, the Management Organization and Compensation Committee of the Board of
Directors and Mr. Aristides have discussed the transition of management
leadership of the Company, and have determined that in connection with such
transition it may be appropriate for Mr. Aristides to retire from the Company
before the end of 1999.
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 2(a) of the Agreement is amended to change the phrase therein
"March 31, 2000" to "December 27, 1999", the effect being that the vesting
of the shares designated by the Agreement to vest on March 31, 2000 shall
vest on December 27, 1999.
2. This Amendment Agreement fully replaces, and renders null and void, the
amendment to the Agreement signed by the parties dated December 11, 1998.
IN WITNESS WHEREOF, the Company and Mr. Aristides have caused this Amendment
Agreement to be executed and delivered, all as of the day and year first above
written.
George Aristides
/s/George Aristides
GRACO INC.
By:/s/Robert M. Mattison
-----------------------------------------------
Robert M. Mattison
Vice President, General Counsel and Secretary
EXHIBIT A
GRACO INC. KEY EMPLOYEE AGREEMENT
AGREEMENT, by and between Graco Inc., a Minnesota corporation (the "Company")
and ________________________________ (the "Executive"), dated as of the ______
day of ______________,_______.
The Board of Directors of the Company (the "Board"), has determined that it is
in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined in Section
2 below) of the Company. The Board believes it is imperative to diminish the
inevitable distraction of the Executive by virtue of the personal uncertainties
and risks created by a pending or threatened Change of Control, to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, to provide inducement for
the Executive to remain an employee of the Company in the event of any
threatened or pending Change of Control, and to facilitate an orderly transition
in the event of a Change of Control. Therefore, in order to accomplish these
objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions: "Effective Date;" "Change of Control Period;"
"Company;" "Affiliated Companies."
(a) The "Effective Date" shall mean the first date during the Change
of Control Period (as defined in Section l(b)) on which a Change
of Control (as defined in Section 2) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of Control
occurs and if the Executive's employment with the Company is
terminated prior to the date on which the Change of Control
occurs, and if it is reasonably demonstrated by the Executive
that such termination of employment (i) was at the request of a
third party who has taken steps reasonably calculated to effect
the Change of Control or (ii) otherwise arose in connection with
or anticipation of the Change of Control, then for all purposes
of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing
on the date hereof and ending on the second anniversary of such
date, provided, however, that commencing on the date one year
after the date hereof, and on each annual anniversary of such
date (such date and each annual anniversary thereof shall be
hereinafter referred to as the "Renewal Date"), the Change of
Control Period shall be automatically extended so as to terminate
two years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the
Executive that the Change of Control Period shall not be so
extended.
(c) The "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets which assumes or agrees to
perform this Agreement by operation of law or otherwise.
(d) As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common
control with the Company.
2. Change of Control. For the purpose of this Agreement
(a) A "Change of Control" means:
(i) acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of
1934), (a "Person"), of beneficial ownership (within the
meaning of Rule 13d-3 under the 1934 Act) which results in the
beneficial ownership by such Person of 25% or more of either
A. the then outstanding shares of Common Stock of the
Company (the "Outstanding Company Common Stock") or
B. the combined voting power of the then outstanding
voting securities of the Company entitled to vote
generally in the election of directors (the
"Outstanding Company Voting Securities");
provided, however, that the following acquisitions will not
result in a Change of Control:
(1) an acquisition directly from the Company,
(2) an acquisition by the Company,
(3) an acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company,
(4) an acquisition by any Person who is deemed to have
beneficial ownership of the Company common stock
or other Company voting securities owned
immediately after said acquisition by the Trust
Under the Will of Clarissa L. Gray ("Trust
Person"), provided that such acquisition does not
result in the beneficial ownership by such Person
of 32% or more of either the Outstanding Company
Common Stock or the Outstanding Company Voting
Securities, and provided further that for purposes
of this Section 2, a Trust Person shall not be
deemed to have beneficial ownership of the Company
common stock or other Company voting securities
owned by The Graco Foundation or any employee
benefit plan of the Company, including without
limitation the Graco Employee Retirement Plan and
the Graco Employee Stock Ownership Plan,
(5) an acquisition by the Executive or any group
that includes the Executive, or
(6) an acquisition by any corporation pursuant to a
transaction that complies with clauses (A), (B)
and (C) of Section 2 (a)(iii) below; and
provided, further, that if any Person's beneficial ownership
of the Outstanding Company Common Stock or Outstanding
Company Voting Securities is 25% or more as a result of a
transaction described in clause (1) or (2) above, and such
Person subsequently acquires beneficial ownership of
additional Outstanding Company Common Stock or Outstanding
Company Voting Securities as a result of a transaction other
than that described in clause (1) or (2) above, such
subsequent acquisition will be treated as an acquisition
that causes such Person to own 25% or more of the
Outstanding Company Common Stock or Outstanding Company
Voting Securities and be deemed a Change of Control; and
provided further, that in the event any acquisition or other
transaction occurs which results in the beneficial ownership
of 32% or more of either the Outstanding Company Common
Stock or the Outstanding Company Voting Securities by any
Trust Person, the Incumbent Board may by majority vote
increase the threshold beneficial ownership percentage to a
percentage above 32% for any Trust Person; or
(ii) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease
for any reason to constitute at least a majority of said
Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors
then comprising the Incumbent Board will be considered as
though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose
initial membership on the Board occurs as a result of an
actual or threatened election contest with respect to the
election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board, or
(iii)The approval by the shareholders of the Company of a
reorganization, merger, consolidation or statutory exchange
of Outstanding Company Common Stock or Outstanding Company
Voting Securities or sale or other disposition of all or
substantially all of the assets of the Company ("Business
Combination") or, if consummation of such Business
Combination is subject, at the time of such approval by
stockholders, to the consent of any government or
governmental agency, the obtaining of such consent (either
explicitly or implicitly by consummation); excluding,
however, such a Business Combination pursuant to which
A. all or substantially all of the individuals and
entities who were the beneficial owners of the
Outstanding Company Common Stock or Outstanding Company
Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly,
more than 80% of, respectively, the then outstanding
shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may
be, of the corporation resulting from such Business
Combination (including, without limitation, a
corporation that as a result of such transaction owns
the Company or all or substantially all of the
Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock or
Outstanding Company Voting Securities,
B. no Person [excluding any employee benefit plan (or
related trust) of the Company or such corporation
resulting from such Business Combination] beneficially
owns, directly or indirectly, 25% or more of the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or the
combined voting power of the then outstanding voting
securities of such corporation except to the extent
that such ownership existed prior to the Business
Combination, and
C. at least a majority of the members of the board of
directors of the corporation resulting from such
Business Combination were members of the Incumbent Board
at the time of the execution of the initial agreement,
or of the action of the Board, providing for such
Business Combination; or
(iv) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
3. Employment Period. For purposes of this Agreement, the term "Employment
Period" shall mean the period commencing on the Effective Date and ending
on the earlier of (i) the termination by the Company or the Executive of
the Executive's employment with the Company, or (ii) the second anniversary
of the Effective Date." As provided in Section 10(f), nothing stated in
this Agreement shall restrict the right of the Company or the Executive at
any time to terminate the Executive's employment with the Company, subject
to the obligations of the Company provided for in this Agreement in the
event of such termination.
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including offices and titles), duties and responsibilities shall
be at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time
during the 90-day period immediately preceding the Effective Date
and (B) the Executive's services shall be performed at the
location where the Executive was employed immediately preceding
the Effective Date or any office or location less than 50 miles
from such location.
(ii) Except as otherwise expressly provided in this Agreement, during
the Employment Period, and excluding any periods of vacation and
sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company. During
the Employment Period it shall not be a violation of this
Agreement for the Executive to (A) serve on corporate, civic or
charitable boards or committees, (B) deliver lectures, fulfill
speaking engagements or teach at educational institutions and (C)
manage personal investments, so long as such activities do not
significantly interfere with the performance of the Executive's
responsibilities as an employee of the Company in accordance with
this Agreement. To the extent that any such activities have been
conducted by the Executive prior to the Effective Date, the
continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the
Effective Date shall not thereafter be deemed to interfere with
the performance of the Executive's responsibilities to the
Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary") which shall
be paid at a monthly rate, at least equal to twelve times the
highest monthly base salary paid or payable to the Executive by
the Company and its affiliated companies in respect of the
twelve-month period immediately preceding the month in which the
Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time as shall be
substantially consistent with increases in base salary generally
awarded in the ordinary course of business to other peer
executives of the Company. The term Annual Base Salary as used in
this Agreement shall refer to Annual Base Salary as so increased.
The Executive's Annual Base Salary shall not be reduced after any
such increase. Any increase in Annual Base Salary shall not serve
to limit or reduce any other obligation to the Executive under
this Agreement.
(ii) Annual Incentive Payments. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year during the
Employment Period, an annual bonus ("Annual Bonus") in cash, in
accordance with the Company's Annual Bonus Plan, or other plan
instituted in lieu of the Annual Bonus Plan which provides for an
annual incentive payment in addition to Annual Base Salary
("Substitute Plan"). The Executive shall participate in the
Annual Bonus Plan or Substitute Plan at the same level at which
the Executive participated immediately prior to the Effective
Date, or if more favorable, at the level of other peer executives
of the Company and its affiliated companies. Any Substitute Plan
instituted by the Company after the Effective Date shall be at
least as favorable, in the aggregate, as the most favorable
Annual Bonus Plan or Substitute Plan in effect at any time during
the 90-day period immediately preceding the Effective Date
(iii)Savings and Retirement Plans. During the Employment Period, the
Executive shall be entitled to participate in all savings and
retirement plans, practices, policies and programs applicable
generally to other peer executives of the Company and its
affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with
savings opportunities and retirement benefit opportunities, in
each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated
companies for the Executive under such plans, practices, policies
and programs as in effect at anytime during the 90-day period
immediately preceding the Effective Date or, if more favorable to
the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its
affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case maybe, shall
be eligible for participation in and shall receive all benefits
under welfare benefit plans, practices, policies and programs
provided by the Company and its affiliated companies (including,
without limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental death
and travel accident insurance plans and programs) to the extent
applicable generally to other peer executives of the Company and
its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with
benefits which are less favorable,, in the aggregate, than the
most favorable of such plans, practices, policies and programs in
effect for the Executive at anytime during the 90-day period
immediately preceding the Effective Date or, if more favorable to
the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its
affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the most
favorable policies, practices and procedures of the Company and
its affiliated companies in effect for the Executive at any time
during the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(vi) Perquisites. During the Employment Period, the Executive shall be
entitled to perquisites in accordance with the most favorable
plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time
during the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(vii)Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and
with furnishings and other appointments, and to secretarial and
other assistance, at least equal to the most favorable of the
foregoing provided to the Executive by the Company at any time
during the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive, as provided generally at
any time thereafter with respect to other peer executives of the
Company.
(viii)Vacation. During the Employment Period, the Executive shall be
entitled to paid vacations in accordance with the most favorable
plans, policies, programs and practices of the Company and its
affiliated companies as in effect for the Executive at any time
during the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer Executives of the
Company and its affiliated companies.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period.
If the Company determines in good faith that the Disability of the
Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the
Executive written notice in accordance with Section 10(b) of this
Agreement of its intention to terminate the Executive's employment. In
such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by
the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned
to full-time performance of the Executive's duties. For purposes of
this Agreement, "Disability" shall mean the absence of the Executive
from the Executive's duties with the Company on a full-time basis for
180 consecutive days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to
the Executive or the Executive's legal representative (such agreement
as to acceptability not to be withheld unreasonably).
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean (i) repeated violations by the Executive of the Executive's
obligations under Section 4(a) of this Agreement (other than as a
result of incapacity due to physical or mental illness) which are
demonstrably willful and deliberate on the Executive's part, which are
committed in bad faith or without the belief on the part of the
Executive that such violations are in the best interests of the
Company and which are not remedied in a reasonable period of time
after receipt of written notice from the Company specifying such
violations or (ii) the conviction of the Executive of a felony
involving moral turpitude.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean:
(i) the assignment to the Executive of any duties materially
inconsistent in any respect with the Executive's position
(including offices and titles), duties or responsibilities as
contemplated by Section 4(a) of this Agreement, or any other
action by the Company which results in a material diminution in
such position, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith
and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(iii)the Company's requiring the Executive to be based at any office
or location other than that described in Section 4(a)(i)(B)
hereof or the Company's requiring the Executive to travel on
Company business to a substantially greater extent than required
immediately prior to the Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with and satisfy Section
9(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section
10(b) of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if
the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date
shall be not more than fifteen days after the giving of such notice).
The failure by the Executive or the Company to set forth in the Notice
of Termination any fact or circumstance which contributes to a showing
of Good Reason or Cause shall not waive any right of the Executive or
the Company hereunder or preclude the Executive or the Company from
asserting such fact or circumstance in enforcing the Executive's or
the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by
the Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability or death, the Date of Termination shall
be the date on which the Company notifies the Executive of such
termination and (iii) if the Executive's employment is terminated by
reason of death or Disability, the Date of Termination shall be the
date of death of the Executive or the Disability Effective Date, as
the case may be.
6. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability. If, within two
years after the Effective Date, the Company shall terminate the
Executive's employment other than for Cause, death or Disability, or
the Executive shall terminate employment for Good Reason, in lieu of
further payments pursuant to Section 4(b) with respect to periods
following the Date of Termination:
(i) except as provided in Section 6(e) below, the Company shall pay
to the Executive, in a lump sum in cash, within 30 days (except
as provided in subsection 6(a)(i)A below) after the Date of
Termination, the aggregate of the following amounts (such
aggregate shall be hereinafter referred to as the "Special
Termination Amount"):
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid,
and, (2) the product of (x) the higher of (I) the midpoint
between the minimum and the maximum bonus payment under the
Annual Bonus Plan or Substitute Plan applicable to the
Executive for the fiscal year in which the Date of
Termination occurs, or (II) the amount that would be payable
to the Executive for the fiscal year in which the Date of
Termination occurs under the Annual Bonus Plan or Substitute
Plan had the termination not so occurred (which amount shall
be payable pursuant to this clause 2 within 30 days after it
is calculated), and (y) a fraction, the numerator of which
is the number of days in the current fiscal year through the
Date of Termination, and the denominator of which is 365
(the sum of the amounts described in clauses (1) and (2)
shall be hereinafter referred to as the "Accrued
Obligations"); and
B. the amount equal to the product of (1) two and (2) the sum
of (x) the Executive's Annual Base Salary and (y) the
midpoint between the maximum and minimum bonus payment
applicable to the Executive for the fiscal year in which the
Date of Termination occurs under the Annual Bonus Plan or
Substitute Plan; and
(ii) for two years following the Date of Termination or such longer
period as any plan, program, practice or policy may provide, the
Company shall continue benefits to the Executive and/or the
Executive's family at least equal to those which would have been
provided to them in accordance with the plans programs, practices
and policies described in Section 4(b)(iv) of this Agreement if
the Executive's employment had not been terminated, in accordance
with the most favorable plans, practices, programs or policies of
the Company and its affiliated companies applicable generally to
other peer executives and their families during the 90-day period
immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that
if the Executive becomes re-employed with another employer and is
eligible to receive medical or disability welfare benefits under
another employer provided plan, the medical and disability
welfare benefits described herein shall cease upon the Executive
and the Executive's family becoming eligible under such other
plan. For purposes of determining eligibility of the Executive
for retiree benefits pursuant to such plans, practices, programs
and policies, the Executive shall be considered to have remained
employed until two years after the Date of Termination and to
have retired two years after the Date of Termination.
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death within two years after the Effective Date, this
Agreement shall terminate without further obligations to the
Executive's legal representatives under this Agreement, other than for
payment of the Accrued Obligations. The Accrued Obligations shall be
paid to the Executive's estate or beneficiary, as applicable, in a
lump sum in cash within 30 days of the Date of Termination, or as
otherwise provided in Section 6(a)(i)(A). In addition, the Executive's
family shall be entitled to receive benefits at least equal to the
most favorable benefits provided by the Company and any of its
affiliated companies to surviving families of deceased peer executives
of the Company and such affiliated companies under such plans,
programs, practices and policies relating to family death benefits, if
any, as in effect with respect to other deceased peer executives and
their families at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive
and/or the Executive's family, as in effect on the date of the
Executive's death with respect to other deceased peer executives of
the Company and its affiliated companies and their families.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability within two years after the Effective Date,
this Agreement shall terminate without further obligations to the
Executive, other than for payment of the Accrued Obligations. The
Accrued Obligations shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination or as otherwise
provided in Section 6(a)(i)(A). In addition, the Executive shall be
entitled after the Disability Effective Date to receive disability and
other benefits at least equal to the most favorable of those generally
provided by the Company and its affiliated companies to disabled
executives and/or their families in accordance with such plans,
programs, practices, and policies relating to disability, if any, as
in effect generally with respect to other disabled peer executives and
their families at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive
and/or the Executive's family, as in effect at any time thereafter
generally with respect to other disabled peer executives of the
Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause within two years after the Effective Date,
this Agreement shall terminate without further obligations to the
Executive other than the obligation to pay to the Executive Annual
Base Salary through the Date of Termination plus the amount of any
compensation previously deferred by the Executive, in each case to the
extent theretofore unpaid. If the Executive voluntarily terminates
employment within two years after the Effective Date, excluding a
termination for Good Reason, this Agreement shall terminate without
further obligations to the Executive, other than Annual Base Salary
through the Date of Termination plus the amount of any compensation
previously deferred by the Executive, in each case to the extent
theretofore unpaid, and any payment that may be due under the terms of
the Annual Bonus Plan or any Successor Plan. In such case, all such
amounts shall be paid to the Executive in a lump sum in cash within 30
days of the Date of Termination or, in the case of any payment under
the Annual Bonus Plan or any Successor Plan, pursuant to the terms
thereof.
(e) Possible Payment Reduction.
(i) Notwithstanding any provision to the contrary contained in this
Agreement, if the lump sum cash payment due and the other
benefits to which the Executive shall become entitled under
Section 6(a) hereof, either alone or together with other payments
in the nature of compensation to the Executive which are
contingent on a change in the ownership or effective control of
the Company or in the ownership of a substantial portion of the
assets of the Company or otherwise, would constitute a "parachute
payment" (as defined in Section 280G of the Internal Revenue Code
of 1986, as amended (the "Code") or any successor provision
thereto), such lump sum payment shall be reduced (but not below
zero) to the largest aggregate amount as will result in no
portion thereof being subject to the excise tax imposed under
Section 4999 of the Code (or any successor provision thereto) or
being non-deductible to the Company for Federal Income Tax
purposes pursuant to Section 280G of the Code (or any successor
provision thereto), provided, however, that no such reduction
shall occur, and this Section 6(e) shall not apply, in the event
that the amount of such reduction would be more than $25,000. The
Executive in good faith shall determine the amount of any
reduction to be made pursuant to this Section 6(e) and shall
select from among the foregoing benefits and payments those which
shall be reduced. No modification of, or successor provision to,
Section 280G or Section 4999 subsequent to the date of this
Agreement shall, however, reduce the benefits to which the
Executive would be entitled under this Agreement in the absence
of this Section 6(e) to a greater extent than they would have
been reduced if Section 280G and Section 4999 had not been
modified or superseded subsequent to the date of this Agreement,
notwithstanding anything to the contrary provided in the first
sentence of this Section 6(e)(i).
(f) Certain Additional Payments by the Company.
(i) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that Section 6(e) above does not
apply and any payment or distribution by the Company to or for
the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this
Agreement, any stock option, restricted stock agreement or
otherwise, but determined without regard to any additional
payments required under this Section 16(f)) (a "Payment") would
be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") or any
interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to
as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including
any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest
and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed
upon the Payments.
(ii) Subject to the provisions of Section 6(f)(iii), all
determinations required to be made under this Section 6(f),
including whether and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by
Deloitte and Touche LLP or such other certified public accounting
firm as may be designated by the Executive (the "Accounting
Firm") which shall provide detailed supporting calculations both
to the Company and the Executive within 15 business days of the
receipt of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the Company. In
the event that the Accounting Firm is serving as accountant or
auditor for the individual, entity or group effecting the Change
of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 6(f),
shall be paid by the Company to the Executive within five days of
the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive with a written opinion
that failure to report the Excise Tax on the Executive's
applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have
been made ("Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 6(f)(iii) and the
Executive thereafter is required to make a payment of any Excise
Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the
Executive.
(iii)The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but no later
than ten business days after the Executive is informed in writing
of such claim (provided that any delay in so informing the
Company within such ten business day period shall not affect the
obligations of the Company under this Section 6(f) except to the
extent that such delay materially and adversely affects the
Company) and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid.
The Executive shall not pay such claim prior to the expiration of
the 30-day period following the date on which it gives such
notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If
the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim,
the Executive shall:
(A) give the Company any information reasonably requested by the
Company relating to such claim,
(B) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by the Company,
(C) cooperate with the Company in good faith in order to
effectively contest such claim, and
(D) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly
all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall
indemnify and hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 6(f)(iii),
the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo
any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct the Executive to pay
the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that
if the Company directs the Executive to pay such claim and sue
for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis, and shall
indemnify and hold the Executive harmless, on an after-tax basis,
from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such
advance or with respect to any imputed income with respect to
such advance; and further provided that any extension of the
statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive
shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other
taxing authority.
(iv) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 6(f)(iii), the Executive becomes
entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of Section 6(f)(iii)) promptly pay to the Company
the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company
pursuant to Section 6(f)(iii), a determination is made that the
Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to
the expiration of 30 days after such determination, then such
advance shall be forgiven and shall not be required to be repaid
and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its
affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or
any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan,
policy, practice or program of or any contract or agreement with the
Company or any of its affiliated companies at or subsequent to the
Date of Termination shall be payable in accordance with such plan,
policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
8. Full Settlement; No Mitigation; Legal Fees. The Company's obligation
to make the payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or
action which the Company may have against the Executive or others. In
no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to
the Executive under any of the provisions of this Agreement and such
amounts shall not be reduced whether or not the Executive obtains
other employment. The Company agrees to pay, to the full extent
permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any contest (regardless of the outcome
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement
or any guarantee of performance thereof (including as a result of any
contest by the Executive about the amount of any payment pursuant to
this Agreement), plus in each case interest on any delayed payment at
the applicable Federal rate provided for in Section 7872(f)(2)(A) of
the Internal Revenue Code of 1986, as amended (the "Code").
9. Successors.
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business and/or assets of the Company
to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
10. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Minnesota, without reference to
principles of conflict of laws. The captions of this Agreement
are not part of the provisions hereof and shall have no force or
effect. This Agreement may not be amended or modified otherwise
than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or
by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
<PAGE>
If to the Executive:
-------------------------------------------
-------------------------------------------
-------------------------------------------
If to the Company:
Graco Inc.
4050 Olson Memorial Highway
Golden Valley, MN 55422
Attention: Vice President, Human Resources
or to such other address as either party shall have furnished to
the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the
addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any
other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of
this Agreement or the failure to assert any right the Executive
or the Company may have hereunder, including, without limitation,
the right of the Executive to terminate employment for Good
Reason pursuant to Section 5(c)(i)(v) of this Agreement, shall
not be deemed to be a waiver of such provision or right or any
other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between
the Executive and the Company, the employment of the Executive by
the Company may be terminated by either the Executive or the
Company at any time prior to the Effective Date or, subject to
the obligations of the Company provided for in this Agreement in
the event of a termination after the Effective Date, at anytime
on or after the Effective Date. Moreover, if prior to the
Effective Date, the Executive's employment with the Company
terminates, then the Executive shall have no further rights under
this Agreement. From and after the Effective Date, this Agreement
shall supersede any other agreement between the parties with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
Executive Graco Inc.
By
Name Name and title
STOCK OPTION AGREEMENT
(NON-ISO)
THIS AGREEMENT, made this day of , 1999, by and between
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Graco Inc., a Minnesota corporation (the "Company") and James A. Earnshaw (the
"Employee").
WITNESSETH THAT:
WHEREAS, the Company pursuant to it's Long Term Incentive Stock Plan
wishes to grant this stock option to Employee;
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto hereby agree as follows:
1. Grant of Option
---------------
The Company hereby grants to Employee, the right and option
(hereinafter called the "option") to purchase all or any part of an
aggregate of 50,000 Common Shares, par value $1.00 per share, at the
price of $ per share on the terms and conditions set forth herein.
2. Duration and Exercisability
---------------------------
A. Except as otherwise set forth herein, this option may not be
exercised by Employee until the expiration of two (2) years from
the date of grant, and this option shall in all events terminate
ten (10) years after the date of grant. During the first two years
from the date of grant of this option, no portion of this option
may be exercised. Thereafter this option shall become exercisable
in four cumulative installments of 25% as follows:
Total Portion of Option
Date Which is Exercisable
---- --------------------
Two Years after Date of Grant 25%
Three Years after Date of Grant 50%
Four Years after Date of Grant 75%
Five Years after Date of Grant 100%
In the event that Employee does not purchase in any one year the
full number of shares of Common Stock of the Company to which
he/she is entitled under this option, he/she may, subject to the
terms and conditions of Section 3 hereof, purchase such shares of
Common Stock in any subsequent year during the term of this
option.
B. During the lifetime of the Employee, the option shall be
exercisable only by him/her and shall not be assignable or
transferable by him/her otherwise than by will or the laws of
descent and distribution.
3. Effect of Termination of Employment
-----------------------------------
A. In the event that Employee shall cease to be employed by the
Company or its subsidiaries for any reason other than his/her
gross and willful misconduct (as set forth on subparagraph B
below), death, retirement (as defined in Section 3(d) below), or
disability (as defined in Section 3(d) below): (i) If such
termination is voluntary, or involuntary and occurs after the
second anniversary of the first day of employment of the Employee
by the Company, the Employee shall have the right to exercise the
option at any time within one month after such termination of
employment to the extent of the full number of shares he/she was
entitled to purchase under the option on the date of termination,
subject to the condition that no option shall be exercisable
after the expiration of the term of the option; (ii) If such
termination is involuntary and occurs before the second
anniversary of the first day of employment of the Employee by the
Company, notwithstanding Section 2(A) hereof, the entire option
granted hereunder shall become immediately and fully exercisable
for a period of six (6) months after the date of such
termination.
B. In the event that Employee shall cease to be employed by the
Company or its subsidiaries by reason of his/her gross and
willful misconduct during the course of his/her employment,
including but not limited to wrongful appropriation of Company
funds, violation of Company policy or the commission of a felony,
the option shall be terminated as of the date of the misconduct.
C. If the Employee shall die while in the employ of the Company or a
subsidiary or within one month after termination of employment
for any reason other than gross and willful misconduct and shall
not have fully exercised the option, all remaining shares shall
become immediately exercisable and such option may be exercised
at any time within twelve months after his/her death by the
executors or administrators of the Employee or by any person or
persons to whom the option is transferred by will or the
applicable laws of descent and distribution, and subject to the
condition that no option shall be exercisable after the
expiration of the term of the option.
D. If the Employee's termination of employment is due to retirement
(either after attaining age 55 with 10 years of service, or
attaining age 65, or due to disability within the meaning of the
provisions of the Graco Long Term Disability Plan), all remaining
shares shall become immediately exercisable and the option may be
exercised by the Employee at any time within three years of the
employee's retirement, or in the event of the death of the
Employee within the three-year period after retirement, the
option may be exercised at any time within twelve months after
his/her death by the executors or administrators of the Employee
or by any person or persons to whom the option is transferred by
will or the applicable laws of descent and distribution, to the
extent of the full number of shares he/she was entitled to
purchase under the option on the date of death, and subject to
the condition that no option shall be exercisable after the
expiration of the term of the option.
4. Manner of Exercise
------------------
A. The option can be exercised only by Employee or other proper
party within the option period delivering written notice to the
Company at its principal office in Minneapolis, Minnesota,
stating the number of shares as to which the option is being
exercised and, except as provided in Section 4(c), accompanied by
payment-in-full of the option price for all shares designated in
the notice.
B. The Employee may, at Employee's election, pay the option price
either by check (bank check, certified check, or personal check)
or by delivering to the Company for cancellation Common Shares of
the Company with a fair market value equal to the option price.
For these purposes, the fair market value of the Company's Common
Shares shall be the closing price of the Common Shares on the
date of exercise on the New York Stock Exchange (the "NYSE") or
on the principal national securities exchange on which the shares
are traded if the shares are not then traded on the NYSE. If
there is not a quotation available for such day, then the closing
price on the next preceding day for which such a quotation exists
shall be determinative of fair market value. If the shares are
not then traded on an exchange, the fair market value shall be
the average of the closing bid and asked prices of the Common
Shares as reported by the National Association of Securities
Dealers Automated Quotation System. If the Common Shares are not
then traded on NASDAQ or on an exchange, then the fair market
value shall be determined in such manner as the Company shall
deem reasonable.
C. The Employee may, with the consent of the Company, pay the option
price by arranging for the immediate sale of some or all of the
shares issued upon exercise of the option by a securities dealer
and the payment to the Company by the securities dealer of the
option exercise price.
5. Payment of Withholding Taxes
----------------------------
Upon exercise of any portion of this option, Employee shall pay to the
Company an amount sufficient to satisfy any federal, state, or local
withholding tax requirements which arise as a result of the exercise
of the option or provide the Company with satisfactory indemnification
for such payment.
6. Change of Control
-----------------
A. Notwithstanding Section 2(a) hereof, the entire option shall
become immediately and fully exercisable on the day following a
"Change of Control" and shall remain fully exercisable until
either exercised or expiring by its terms. A "Change of Control"
means:
(1) acquisition by any individual, entity, or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act
of 1934),
<PAGE>
(a "Person"), of beneficial ownership (within the meaning of
Rule 13d-3 under the 1934 Act) which results in the
beneficial ownership by such Person of 25% or more of either
(a) the then outstanding shares of Common Stock of the
Company (the "Outstanding Company Common Stock") or
(b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company
Voting Securities");
provided, however, that the following acquisitions will not
result in a Change of Control:
(i) an acquisition directly from the Company,
(ii) an acquisition by the Company,
(iii) an acquisition by an employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company,
(iv) an acquisition by any Person who is deemed to have
beneficial ownership of the Company common stock
or other Company voting securities owned by the
Trust Under the Will of Clarissa L. Gray ("Trust
Person"), provided that such acquisition does not
result in the beneficial ownership by such Person
of 32% or more of either the Outstanding Company
Common Stock or the Outstanding Company Voting
Securities, and provided further that for purposes
of this Section 6, a Trust Person shall not be
deemed to have beneficial ownership of the Company
common stock or other Company voting securities
owned by The Graco Foundation or any employee
benefit plan of the Company, including, without
limitations, the Graco Employee Retirement Plan
and the Graco Employee Stock Ownership Plan,
(v) an acquisition by the Employee or any group that
includes the Employee, or
(vi) an acquisition by any corporation pursuant to a
transaction that complies with clauses (a), (b),
and (c) of subsection (4) below; and
provided, further, that if any Person's beneficial ownership
of the Outstanding Company Common Stock or Outstanding
Company Voting Securities is 25% or more as a result of a
transaction described in clause (i) or (ii) above, and such
Person subsequently acquires beneficial ownership of
additional Outstanding Company Common Stock or Outstanding
Company Voting Securities as a result of a transaction other
than that described in clause (i) or (ii) above, such
subsequent acquisition will be treated as an acquisition that
causes such Person to own 25% or more of the Outstanding
Company Common Stock or
<PAGE>
Outstanding Company Voting Securities and be deemed a Change
of Control; and provided further, that in the event any
acquisition or other transaction occurs which results in the
beneficial ownership of 32% or more of either the Outstanding
Company Common Stock or the Outstanding Company Voting
Securities by any Trust Person, the Incumbent Board may by
majority vote increase the threshold beneficial ownership
percentage to a percentage above 32% for any Trust Person; or
(2) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of said Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board will be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial membership on the Board occurs as a result of an
actual or threatened election contest with respect to the
election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(3) The commencement or announcement of an intention to make a
tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a Person of 25%
or more of the Outstanding Company Common Stock or
Outstanding Company Voting Securities; or
(4) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, or statutory exchange
of Outstanding Company Common Stock or Outstanding Company
Voting Securities or sale or other disposition of all or
substantially all of the assets of the Company ("Business
Combination") or, if consummation of such Business
Combination is subject, at the time of such approval by
stockholders, to the consent of any government or
governmental agency, the obtaining of such consent (either
explicitly or implicitly by consummation) excluding, however,
such a Business combination pursuant to which
(a) all or substantially all of the individuals and entities
who were the beneficial owners of the Outstanding Company
Common Stock or Outstanding Company Voting Securities
immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 80%
of, respectively, the then outstanding shares of common
stock and the combined voting power of the then
outstanding voting securities entitled to vote generally
in the election of directors, as the case may be, of the
corporation
<PAGE>
resulting from such Business Combination (including,
without limitation, a corporation that as a result of
such transaction owns the Company or all or substantially
all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common
Stock or Outstanding Company Voting Securities,
(b) no Person [excluding any employee benefit plan (or
related trust) of the Company or such corporation
resulting from such Business Combination] beneficially
owns, directly or indirectly, 25% or more of the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership
existed prior to the Business Combination, and
(c) at least a majority of the members of the board of
directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the
action of the Board, providing for such Business
Combination; or
(5) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
B. A Change of Control shall not be deemed to have occurred with
respect to an Employee if:
(1) the acquisition of the 25% or greater interest referred to in
subparagraph A.(1) of this Section 6 is by a group, acting in
concert, that includes the Employee or
(2) if at least 25% of the then outstanding common stock or
combined voting power of the then outstanding company voting
securities (or voting equity interests) of the surviving
corporation or of any corporation (or other entity) acquiring
all or substantially all of the assets of the Company shall
be beneficially owned, directly or indirectly, immediately
after a reorganization, merger, consolidation, statutory
share exchange, disposition of assets, liquidation or
dissolution referred to in subparagraph (4) and (5) of this
section by a group, acting in concert, that includes that
Employee.
<PAGE>
7. Adjustments
-----------
If Employee exercises all or any portion of the option subsequent to
any change in the number or character of the Common Shares of the
Company (through merger, consolidation, reorganization,
recapitalization, stock dividend, or otherwise), Employee shall then
receive for the aggregate price paid by him/her on such exercise of
the option, the number and type of securities or other consideration
which he/she would have received if such option had been exercised
prior to the event changing the number or character of outstanding
shares.
8. Miscellaneous
-------------
A. This option is issued pursuant to the Company's Long-Term
Incentive Stock Plan and is subject to its terms. A copy of the
Plan has been given to the Employee. The terms of the Plan are
also available for inspection during business hours at the
principal offices of the company.
B. This Agreement shall not confer on Employee any right with respect
to continuance of employment by the Company or any of its
subsidiaries, nor will it interfere in any way with the right of
the Company to terminate such employment at any time. Employee
shall have none of the rights of a shareholder with respect to
shares subject to this option until such shares shall have been
issued to him upon exercise of this option.
C. The Company shall at all times during the term of the option
reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on the day and year first above written.
Employee Graco Inc.
By
Name Name and title
<TABLE>
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
Thirteen Weeks Ended
----------------------------------
Mar. 26, 1999 Mar. 27, 1998
------------- --------------
<S> <C> <C>
Net earnings applicable to common shareholders
for basic and diluted earnings per share $ 11,201 $ 8,947
Weighted average shares outstanding for basic
earnings per share
20,104 25,635
Dilutive effect of stock options computed using the
treasury stock method and the average market
price 502 604
Weighted average shares outstanding for diluted
earnings per share 20,606 26,239
Basic earnings per share $ 0.56 $ 0.35
Diluted earnings per share 0.54 0.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Graco
Inc. and subsidiaries consolidated balance sheets for the quarterly period
ending March 25, 1999 and is qualified in its entirety by reference to such
statements.
</LEGEND>
<CIK> 0000042888
<NAME> GRACO INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-25-1998
<PERIOD-END> MAR-25-1999
<EXCHANGE-RATE> 1
<CASH> 4,204
<SECURITIES> 0
<RECEIVABLES> 85,562
<ALLOWANCES> 4,400
<INVENTORY> 34,111
<CURRENT-ASSETS> 133,175
<PP&E> 199,706
<DEPRECIATION> 105,355
<TOTAL-ASSETS> 233,572
<CURRENT-LIABILITIES> 77,110
<BONDS> 107,068
0
0
<COMMON> 20,294
<OTHER-SE> 1,299
<TOTAL-LIABILITY-AND-EQUITY> 233,572
<SALES> 103,241
<TOTAL-REVENUES> 103,241
<CGS> 50,384
<TOTAL-COSTS> 50,384
<OTHER-EXPENSES> 33,903
<LOSS-PROVISION> 148
<INTEREST-EXPENSE> 1,953
<INCOME-PRETAX> 17,001
<INCOME-TAX> 5,800
<INCOME-CONTINUING> 11,201
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,201
<EPS-PRIMARY> .56
<EPS-DILUTED> .54
</TABLE>
